International Price and Earnings Momentum
European Journal of Finance, Vol. 18, No. 5-6, 2012, pp. 535-573
Posted: 18 Sep 2012
Date Written: September 17, 2012
In this paper, we find that price and earnings momentum are pervasive features of international equity markets even when controlling for data-snooping biases. For Europe, we show price momentum to be subsumed by earnings momentum on an aggregate level. However, this rationale can hardly be sustained on a country level. Also, the above explanation is confined to certain time periods in the USA. Since we cannot establish a decent relation between momentum and macroeconomic risks, we suspect a behavior based explanation to be at work. In fact, we find momentum profits to be more pronounced for portfolios characterized by higher information uncertainty. Hence, the momentum anomaly may well be rationalized in a model of investors underreacting to fundamental news. Finally, we find that momentum works better when limited to stocks with high idiosyncratic risk or higher illiquidity, suggesting that limits to arbitrage deter rational investors from exploiting the anomaly.
Keywords: earnings momentum, price momentum, market efficiency, multiple hypothesis testing, information uncertainty, liquidity
JEL Classification: G11, G12, G14, M40
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